(Crain’s) — Net income for the parent of Blue Cross & Blue Shield of Illinois dipped to about $408 million in the first quarter, compared with a year ago, as claims rose faster than revenue.

Health Care Service Corp.’s first-quarter net income slipped 6.7 percent, to $407.6 million, down from the $436.8 million during the first quarter of 2011, according to its latest financial statement.

Last year, the Chicago-based mutual company, which is owned by policy holders, booked net income of more than $1 billion, the second straight year that Health Care Service has crossed the benchmark.

First-quarter income dropped even though total revenue rose 3.2 percent, to $5.1 billion during the first quarter, compared with about $4.95 billion during the year-earlier period, as enrollments grew.

Health Care Service has a tight grip on the health insurance market in Illinois, writing nearly 72 percent of all large-group plans, about 54 percent of all small-group plans and roughly 64 percent of all individual plans in 2010.

The strong market position gives Health Care Service leverage in negotiations with both customers and providers, allowing the company to drive up premiums while holding down the cost of claims. The company also has strong market power in Texas.

“There are a few larger states that seem more susceptible to aggressive Blue Cross pricing, (including) Arizona, Illinois and Texas,” said analyst Carl McDonald, of Citigroup Global Markets Inc., in a May 21 report on the nonprofit Blue Cross plans, including Health Care Service.

A Health Care Service spokesman said the company uses its market power to negotiate lower reimbursement rates with providers, then passes on savings to its members.

“We slowed the rate of increases in Texas and Illinois and, for some customers, provided lower rates,” he said.

The financial statement does not include Health Care Service’s low-margin business processing claims for self-insured plans, such as those of big employers.

Health Care Service’s first quarter gain in revenue was nearly completely eroded by an increase in claims paid for hospital and other medical expenses.

Medical benefits rose 4.9 percent, to $3.4 billion, during the first quarter, compared with 2011. Drugs claims increased at an even faster clip, shooting up 9.7 percent, to $613.7 million, compared with a year ago.

“This was due to a combination of higher membership and increase in utilization,” the spokesman said.

Health Care Service’s insured population edged up 2.7 percent, to 7.8 million, during the first quarter, compared with the first quarter of 2011.

In addition to Illinois and Texas, the company also operates Blue Cross plans in Oklahoma and New Mexico.

The company is one of the top-performing Blue Cross plans in the nation, compared with 33 other nonprofit Blue plans studied by New York-based Citigroup. The study is based on publicly available financial information about the Blues’ insurance businesses that the companies report to the National Association of Insurance Commissioners.

Health Care Service’s underwriting margin of 7.5 percent was the second-highest of any nonprofit Blue Cross Plan in 2011, Citigroup found.

Underwriting margin, the ratio of gains from underwriting, net of operating expenses, to total revenue, is a key measure of the profitability of insurance operations, not including investment activity.

The company’s margin reached 10 percent during the first quarter, Crain’s estimates, based on the financial statement.

Health Care Service also has a strong balance sheet, with a risk-based capital ratio of 12.27-to-1 in 2011, according to the Citigroup report. The ratio is a measure of the proportion of total capital to state-required capital level.

The average for all nonprofit Blues was 9.05-to-1.